The Securities and Exchange Commission said Walter Morales, a Baton Rouge hedge fund manager, and his firm Commonwealth Advisors defrauded investors by hiding $32 million dollars in losses, which suffered during the financial crisis from investments tied to residential mortgage-backed securities.
Morales and his firm sold RMBS into the collateralized debt obligation at prices they had obtained four months prior, while knowing the RMBS had drastically declined.
Morales told his employees to handle a series of scheming trades between the hedge funds they advised to conceal the financial loss experienced by one of the funds in its Collybus investment because he saw the CDO investments continue to perform poorly.
Commonwealth and Morales created false internal documents to justify their false valuations when they lied to individual investors about the amount and value of the mortgage-backed assets in the hedge funds.
Rather than confess to investors about the decline, Commonwealth executed more than 150 deceptive cross-trades from two hedge funds, according to the SEC’s complain filed in the U.S. District Court for the Middle District of Louisiana.
"Morales and Commonwealth Advisors concealed significant hedge fund losses from investors, including pension fund investors, instead of owning up to them and facing the consequences," said Robert Khuzami, Director of the Securities and Exchange Commission’s Division of Enforcement.
He added, "Investors put their fundamental trust in the hands of their investment adviser, and they deserve better than being manipulated and lied to through deceptive trades and phony documents."